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Venezuela Is Doing Something It Hasn’t Done Since The 90s

Caracas is preparing the return of oil contracts with private companies that were last used in the 1990s before the Chavez era that made PDVSA the one and only operator of oil fields. Reuters reported this week it had seen a draft of the contract stipulating the state oil company will give control over several fields to a set of local companies for a period of six years. The companies will have to commit to boosting production, funding field maintenance, and purchasing whatever equipment they need to do all this. In exchange, PDVSA will pay them a fee for the oil they extract.

It smacks of privatization, albeit temporary, but how successful it would be remains an open question. Sources close to the developments told Reuters the draft document was the foundation of a production-boost plan announced by President Nicolas Maduro at the end of August. The plan, PDVSA’s head, Manuel Quevedo, said later, would involve investments of US$430 million to increase oil production by 641,000 bpd. The company picked 14 companies to take part, but the names of only seven have been made public.

Most, Reuters reports, are oilfield service providers, which means they don’t necessarily have oil production experience. Five of them are Venezuelan, one is based in Panama, and one is Chinese. According to the draft contract, in addition to the fees they receive for the oil they produce, the companies will also be reimbursed for the investments they make in the fields. Can the plan work?

There are a lot of “ifs” here. Anything is theoretically possible, even a reversal of Venezuela’s sliding oil production, especially if it is urgently necessary. This is precisely the case: with booming hyperinflation, hundreds of millions in delayed payments to creditors by PDVSA, and, most recently, a decision by Caracas to cut fuel subsidies, Venezuela is teetering on the brink of total collapse. Oil is Venezuela’s biggest asset. It makes sense it would try to use it better. The problem seems to be the choice of field operators. And the other problem is that Caracas does not really have a choice. Related: Can Oil Demand Really Peak Within 5 Years?

Foreign companies were driven out of the country by the Chavez government. Now, even if they would like to come back, they couldn’t because of the severe U.S. sanctions against Caracas. Even if there were no sanctions, a return of Big Oil to Venezuela would be questionable: the Chavez nationalization must have left a bad taste. So, Venezuela really does not have any other options, but to entrust its planned production boost to local companies. And it really needs this boost.

According to OPEC’s secondary sources, Venezuela’s oil production in July dropped to below the 1.3-million-bpd mark—at 1.278 million bpd, plunging 47,700 bpd from June. This compares with an average of 2.154 million bpd in 2016, and an average of 1.911 million bpd in 2017. Some analysts expect production to fall to below 1 million bpd by the end of this year. The production problem, in other words, is getting more urgent by the day.

Yet, another problem could outshine it very soon. Media covering the proposed fuel subsidy curb recall the last time a Venezuelan government tried to raise prices at the pump. It was in 1989 and it led to riots and an attempted coup. Cutting fuel subsidies, in other words, is a desperate move that might not end well for the government in Caracas, even if it manages to boost oil production with the help of the seven private companies.

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Spend billions for years only to have them steal it again. No thanks. It's a big planet. Let the Chinese do it with Chinese manpower. Give them a taste of what it is like working for a Chinese overlord. Hint: no long lunches, or naps on the job.

Eduardo on September 13 2018 said:

The key word here is giving control to "local companies". Not one international oil company will invest in VZ for a hundred years. Local VZ companies have no cash, no expertise, no competent employees.

Dan on September 13 2018 said:

Maybe this will work or maybe not.

However each and every contract comes with the mandatory cash pipeline to Andorran, Swiss, and Cayman off shore bank accounts for the ruling class.

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